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FamPA · Dec 21, 2011, 08:09 AM

My son is going to lend money to my daughter and her husband as a mortgage (they will use it to pay off existing mortgage). What documents do we need to create? I'm assuming some sort of mortgage agreement. Do we need to file these documents somewhere to make the mortgage legal? We live in PA, is there somewhere online where we can get a mortgage template to use for this new mortgage?

Fr_Chuck · Dec 21, 2011, 08:20 AM

Since this would appear to be a larger sum of money, please spend a few hundred dollars and have an attorney draw up the paper work. And yes it is filed at the court house normally at the recorder of deeds office.

If not done correctly your son could end up losing 1000's if they don't pay and he has trouble foreclosing latter.

joypulv · Dec 21, 2011, 09:05 AM

I've borrowed from family for real estate twice, and used the IRS intra-family loan rate tables, which vary monthly, and which vary < 9 years or over. You are not allowed to charge less than the published rates (which are nice and low).

I never recorded the lien nor used a lawyer, juat paperwork and signed agreements. But it's your choice. I wasn't borrowing more than 35 or 40K.

FamPA · Dec 21, 2011, 11:38 AM

Thanks for the responses. I have done this before with my own mortgage (and my in-laws) many years ago. We basically did it the first way mentioned with nothing official. But, since this is my kids, I'm trying to make sure that we do it right. I am trying to avoid having to spend a lot to get this done. If I could just get a mortgage template or sample to adapt and fill out and then some guidance on what the exact legal steps are for filing (and if filing is absolutely necessary), that would be great.

joypulv · Dec 21, 2011, 11:49 AM

Filing puts a lien on the house so that you can repossess it if the loan isn't paid. But you can do the same thing in court without a lien.
You haven't said if you want a fixed rate or variable (the intra- rates are variable).
Find an amortization table in Excel or anywhere online.
If you don't want to pay a lawyer, state the amount, term, when due, monthly payment, interest if fixed or reference if variable, and penalties if not paid.
If it's a lot and long term, require a term life insurance policy with you as the beneficiary. So that no one changes that or stops paying that, you should buy the insurance and tack it onto the payment.
Other considerations are the timely paying of property taxes, and keeping the house in good repair.
You need to issue a 1099 and pay taxes on the interest so that they can deduct the interest.

joypulv · Dec 21, 2011, 11:52 AM

Another huge consideration is the spouse... now that I think about it more, since your daughter is married I would pay a lawyer so that the problems of divorce etc are taken care of, especially as divorce laws will affect this differently according to the state they live in.

ebaines · Dec 21, 2011, 02:58 PM

For clarification - if you have a simple loan agreement between the lender and borrower it's not officially a mortgage - just a personal loan. Under this arrangement your daughter and her husband own title free and clear, but have borrowed money from your son to finance it. It's really no different than loaning money to buy a car or anything else- he does not file anything with the town or county. But he does need a contract with terms that meet the IRS guidleines for a loan or else it could be considered a gift - joypulv gave a good list, but especially note that the agreement must be for a fixed term with penalties for non payment. A couple of other points: if this is a personal loan your daughter and husband can not deduct the interest payments on their taxes, since it's not a mortgage; and the son has to report the interest as income on his taxes.

Joypulv - I don't think the lender can go after the house in court if they fail to pay. Most states have "homestead" laws which preclude that, so only mortgage lenders can foreclose on a house. If the daughter failed to pay the son's recourse would be a lawsuit which may lead to wage garnishment.

joypulv · Dec 22, 2011, 04:19 AM

Oh! I didn't know that the borrowers couldn't deduct the interest they pay! (I never did but thought one could.) A good reason to charge the lowest rate acceptable to the IRS. It is a pain though because it varies monthly, so you want to set up an Excel file to calculate it. (What I did was pay a fixed amount and calculate/adjust at the end of the year. Unless rates skyrocket it won't be much difference.)

FamPA · Dec 22, 2011, 06:50 AM

Lots of good info here. Thanks to all! When we did this type of arrangement with my in-laws back in the 90's, we did deduct the interest paid as mortgage interest on our taxes even though we never did any official filing. Is there some way in the loan agreement that we create and have both parties sign to make it a mortgage instead of just a loan? What legally does classify this loan as a mortgage?

By the way, I have every intention of creating an amortization schedule for this 20 year fixed rate mortgage with an acceptable interest rate (based on current rates) and they would be paying my son back and occasionally throwing some extra to the principal just like a real mortgage.

ebaines · Dec 22, 2011, 07:49 AM

The mortgage must be recorded with the local authorities, and to allow for tax deduction it must specify that the home itself is collateral. Your son will have to file form 1098 with the IRS each year to document the interest paid. I strongly suggest that both parties engage the services of an attorney (not the same attorney!) - one to help your son write the loan agreement and the other to represent your daughter and son-in-law to review it. There will be attorney fees anyway for the closing on the property, so the incrementall cost should be minimal. Even though this loan is all in the family, an attorney can help think through scenarios such as divorce, death, sickness, loss of job, etc that may occur.